Frothy Market Driving Multiples Up - Deals Failing Left and Right

I've been hearing noise from fellow searches and from lenders that multiples are trending upward, largely because there are just more buyers. Many brokers are focused on taking the highest priced LOI and moving forward. The result is a glut of failed deals that never come to fruition. Why? The math doesn't work.

Searchers want to execute the deal dream where they put a meager 10% down, borrow the max they can from the SBA, and build generational wealth. The reality is, however, that there is NO world where a deal above 4.0x EBITDA/SDE can be executed with just 10% down. I built the basic calculator below that sets the max loan amount to cap at 1.50x DSCR. That cap is hit at less than 90% Debt/EV ratios for any deal above 4.0x EBITDA. This is exacerbated by all the companies who are off 10-20% YoY in revenue, EBITDA probably worse, and want to be valued on their peak 2022/23 cash flow levels. I'll repeat, the math doesn't work.

So, my warning fellow searchers is this, either a) stop offering prices that you cannot finance or b) come prepared to write bigger equity checks. The more failed search deals that happen, the less attention or, better said, reception we will all get from the seller community.

(Spreadsheet available if anyone wants to play with it)